UK inflation, as expected slipped back to zero last month as prices in clothing, food and fuel continued to falter. Oil prices, on the back the Iran deal look set to be even softer over the coming months and this may delay any monetary tightening from the BOE.
This has been the case since February and when taken in context of wage growth, which has risen at the fastest pace in almost eight years, it’s actually a positive for the UK economy. It’s expected that real pay growth around 3% will be sustainable for the next couple of years and may well push towards the pre-crisis growth of 4.5% by 2017.
Last week’s Budget tends to present a mixed outlook. The cap of 1% on public sector pay, despite low current inflation levels could take its toll. Productivity growth needs to recover. Should this not materialise and wage growth continues its trajectory, we may well see the MPC forced to accelerate its tightening timeline. Some policymakers, including Martin Weale and Ian McCafferty, have hinted that they could start calling for rates to rise from a record low of 0.5% in the coming months. Markets are pricing in a 65% probability of a rate hike by year end
Cable has barely moved but a strong Spanish bond auction has elevated the euro slightly against the pound in early trade but while below the 0.7150 level, the trend should favour a weaker euro. Industrial production in the euro area rose 1.6% year on year but slowed on the month. Investor expectations saw a print of 29.7 versus the consensus for 29. For now, any contagion risk from Greece seems to be waning.
The UK benchmark is beginning to look a little toppy at current levels. The fact that the main gainers in the FTSE have been of the defensive variety should signal a warning. Mark Carney is due to speak later and may offer some clues as to when we can expect a rate hike.
Equities Highlights:
Meggit (+2.7%) Bid speculation has sent the defence and aerospace engineer to the top of the UK benchmark today. Rothschild, its financial adviser is said to be drawing up potential defence plans. Meggitt’s appointment of Sir Nigel Rudd as chairman in April stoked speculation that it could be a bid target. United Technologies (NYSE:UTX) and Honeywell are seen as being among the potential buyers. Since March, the share price has fallen dramatically by some 23% but has seen some bargain hunting at the 450p level. Average broker target price is 540p.
Michael Page (-2.52%) despite record sales in high potential markets, FX headwinds have made found their mark. A slowdown in its Asia Pacific region is also weighing. The recruitment firm reported a 6% like-for-like gross profit rise to £145.3m (€204.73m, $224.81m) in the second quarter of its 2015 financial year on 14 July. The EMEA gross profit as reported grew by 0.6% year-by-year, but the company said it went up by 11.4% on a constant basis.
ITV (LONDON:ITV) (-1.7%) Deutsche Bank (XETRA:DBKGn) have cut the company to sell implying a 19% downside from the current price. The bank states that ITV have had it ‘too easy for too long’ and that its online weakness is starting to show. DB appear to be the outlier in their assessment on the company. The majority have a buy or hold recommendation on the stock. Shares in ITV have risen circa 30% year to date and are currently trading at an all-time high. The average target price is for additional gains to 286p.
SKY PLC (LONDON:SKYB) (1.76%) Raised to buy by Deutsche Bank. Also trading at an all-time high, and up 23% year to date. DB clearly see additional upside for the company. Strong resistance at 1110p may see the stock decline before a move higher. Support found around the 1060 p level.
Pearson (LONDON:PSON) (-1.6%): A plethora of broker rating cuts have sent the Financial Times owner to the bottom of the pile this morning. Having lost yet another contract, this time the New York testing contract for language, arts and maths, fears of another profit warning this year have encouraged broker Liberum to reiterate its sell recommendation and a target price of 800p. Shares have been in decline since hitting a high of 1517p back in late March, falling as low as 1200p this month (21% fall from highs). Buyers have stepped in at this level in the past, should this support fail, then we will likely see an additional drop to 1113p.
US Retail sales will be in focus later this afternoon. A rise of 0.2% is expected on the month. We are calling the Dow flat on the open.
Iran deal rises the probability of a BoC cut on July meeting
Oil slides 2% on news that a nuclear deal with Iran has finally been reached. Iran, OPEC’s second largest producer, is now getting ready to step in the oversupplied oil market to boost competition. The 60% slide in the oil market over the past year has significantly tightened the profit margins and already pushed several players out of the market. The Saudi’s determination to expand its market share has already been a heavy weight on the global players’ shoulders. As Iran warms up to enter the game, its capacity to flood the market and its competitive advantage in a market suffering from tight profit margins could only drive competition out of the door. Iranian Oil Minister says a million barrel could be added within 7 months. Get prepared for another wave of weakness in oil markets.
The Iran deal has been the catalyst for the Canadian dollar weakness versus the US dollar. USD/CAD hit 1.28 for the first time since March 18. The market requires lower rates from the bank of Canada in anticipation of further debasement in the oil market. The Iran deal increases the probability of a 25 basis point cut in July 15 MPC meeting. It is just a matter of time before the USD/CAD hits the 1.30 for the first time in more than six years.
Asymmetry in Greek deal could cost more to the EU
The asymmetry of deal that Greece has accepted raises several questions on how healthy is this deal for Greece and the EU. First, Greece has been constrained to accept a more coercing deal than the one that has got rejected by the population on July 5 referendum. The EU menaces outweighed democracy at its birth place. Second, the sovereignty of member states is highly questionable and could lead to a rising risk of political contagion. In the absence of which, Germany – the major winner on the euro deal – could expand its financial and diplomatic power across Europe. Third, the political squeeze in Greece could revive reactions in the UK and increase the mass of non-EU partisans. A potential Grexit from the EU could be an expensive bill for the EU. The strategic mistake from Germany - that has showed a disproportional and excessive power in Greek negotiations - could lead to further instability within the economic union.
Greece paid back Yen 11.7 billion of samurais yesterday, yet is not expected to pay the Eur 450 million due to the IMF on Monday.
Greek PM Tsipras has until tomorrow to get the EU deal approved by the Parliament and avoid a default on its 3.5 billion euro bond repayment to the ECB on July 20. Same old, just another chapter in the story of an unhappy union.
The European equity indices are flat after having recovered on Greek-deal optimism and also the depreciation in the euro. DAX futures advanced to the critical resistance zone 11400/600 while FTSE futures tested 6700. The US stocks welcomed the Greek deal quite cheerfully: the S&P 500 added 1.11%, Dow Jones rose 1.22% and NASDAQ gained 1.48%. Tokyo followed with +1.47% on Nikkei 225 and +1.56% on TOPIX. Chinese equities retreated slightly (as correction of past sessions’ rallies). The sentiment is positive enough to push the equity indices higher, the pending event risk (Greece!) should however keep the upside bumpy before any concrete resolution out of Greece. The metal & mining companies could also see some downside pressure on falling energy prices following the Iran deal.